Handling IT Subscriptions Under GASB’s Lease Accounting Standard: Part Two

You are finally ready to implement GASB 96, Subscription-Based IT Arrangements (SBITA). What’s next? What do you need to do to implement this standard?

In June, 2022, Weaver’s Jennifer Ripka discussed key points to keep in mind for implementing a new accounting standard for IT subscriptions. GASB Statement No. 96: Subscription-Based Information Technology Arrangements (SBITA), addresses the new guidance that will require districts to recognize arrangements that meet the criteria to be reported as a right-to-use subscription based asset and a corresponding subscription liability. This is a follow-up article for districts preparing to comply with the new standard, which needs to be implemented in fiscal 2023.

You are finally ready to implement GASB 96, Subscription-Based IT Arrangements (SBITA). You have gathered all of the agreements and documents and consulted with your IT department and other department directors. What’s next? What do you need to do to implement this standard?

First, list each SBITA in a spreadsheet. Document the asset/purpose of the arrangement, subscription term, interest rate (or implied borrowing rate) monthly payment and annual cost and any optional periods. Just as with GASB 87, Leases, exclude arrangements that are 12 months or less as well as any cancellable periods. For the subscription term, remember that cancellable periods include any for which both the government and the SBITA vendor have an option to terminate the SBITA without permission from the other party. These should be excluded from the subscription term.

For those short term arrangements, your organization should recognize the subscription payments as outflows of resources (i.e. expenditure). You should recognize an asset if a subscription payment is made in advance (i.e. prepaid) or if liability subscription payments are to be made subsequent to a reporting period (i.e. accounts payable).

You can also use a materiality threshold to evaluate your arrangements. With the materiality threshold, it is up to your organization to set a threshold. You need to set a methodology and be consistent with it. You may choose a flat threshold, like $25,000, a percentage of government-wide expenditures, or another methodology. Just be sure to document whatever methodology you choose and apply it consistently.

Next, recognize a subscription liability and an intangible right-to-use asset (a capital asset referred to as the subscription asset). Like GASB 87, this statement is forward looking, so no prior period adjustment will be made upon the recognition of the right-to-use asset and subscription liability. The future subscription payment should be discounted using the interest rate the SBITA vendor charges, which may be implicit. If this cannot be determined, you may use your organization’s incremental borrowing rate. Then in subsequent financial reporting periods, calculate the amortization of the discount on the subscription liability and report that as an outflow of resources (i.e. interest expense).

If you follow these steps, you should be able to correctly identify and record your organization’s subscription-based IT arrangements with ease!

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